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Coface Credit Rating

Aman Union Seminar. Coface Credit Rating. Gregory Mongrolle, Lead Analyst – Middle-East. 04. 04. 2011. Coface Credit Rating - Agenda. Coface Credit Rating (CCR) Scale Use of ratings for Coface Lists and types of companies to be rated CCR Production Standards: Main Principles

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Coface Credit Rating

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  1. Aman Union Seminar Coface Credit Rating Gregory Mongrolle, Lead Analyst – Middle-East 04 04 2011

  2. Coface Credit Rating - Agenda • Coface Credit Rating (CCR) Scale • Use of ratings for Coface • Lists and types of companies to be rated • CCR Production Standards: Main Principles • Types of CCRs • CCR with figures • Quick Ratings • Derived Ratings • Ratings in the Middle-East • Breakdown by countries • Countries covered

  3. Coface Credit Rating Scale

  4. Use of Ratings for Coface (1/2) Predictive of Default Rates

  5. Use of Ratings for Coface (2/2) • Improving risk management on significant exposures in credit insurance • 35% of Coface exposure is rated • Tool for monitoring risk (discriminating risk in a portfolio, actions during crisis…) • Calculating RWE (Risk Weighted Exposure) by confirming scores • Permit to limit access to high risk products (minimum ratings for bonds, single risk/buyer, factoring…) • Derived uses: Probabilities of defaults, expected average loss + PMLs • Statistical reporting on credit insurance activities • Detecting unusual risks (high PMLs) – Solvency 2 • Adapting the reinsurance system • Calculating our economic capital requirement • Improving our pricing

  6. CCR Production Standards: Main Principles • The production of CCRs is the mission of the Rating Line • Risk management in Credit Insurance is the unique use of CCRs • External Communication, even with the rated company, is forbidden • The production process integrates contacts as often as possible with the rated companies to update figures and collect in-depth information. Additional information is collected from other public and confidential sources, proprietary to Coface or not • Rating Analysts monitor the credit risk on rated companies • Decision process requires the involvement of (at least) two pairs of eyes or a Rating Committee

  7. Lists & types of companies to be rated • Large existing exposure in credit insurance: • Group of buyers with exposure > EUR 12Mn • Buyers with exposure > EUR 6Mn #14,000 companies to be rated (based on 31/12/10 exposure) • Spot Ratings • For large POTENTIAL limit: No need for rating • For specific covers (as per UW standards) such as bonds, ceding risk for factoring, single buyers, single risks • By rating lines • By BRE for Unistrat applications

  8. Types of CCRs: CCR with figures (1/2) • Use of Ratios • Evolution Ratios • Evolution of Turnover • Evolution of Turnover compared to the evolution of Fixed Assets • Evolution of Turnover / (Current Liabilities – Cash) • Evolution of Operating margins • Profitability and Economic efficiency Ratios • Net and Operating margin • Return on Assets • Interest Coverage Ratio • Structure Ratios • Leverage Ratio • Debt Repayment Time ratio • Liquidity Ratios

  9. Types of CCRs: CCR with figures (2/2) • Statistical Corrections • Country Factor • Industry Factor • Size Factor • Qualitative Corrections • The activity and the market structure (e.g. competition, cyclicality, capital intensive, price driven market) • Company’s specific position (e.g. leadership, upward trend in the order book, supplier or client dependence) • Production & Products (i.e. internal and external constrains) • Financing policy and contingencies (e.g. evolution of indebtness, source of financing, payment incidents) • Shareholder, Management & the State

  10. Type of CCRs: Derived Rating (CCR derived from related company) Coface thinks that in some cases it uses a rating as reference for closely linked companies/groups • When rating a subsidiary (for which no figures are available) of a rated Group • If links between the companies are qualified as strategic investment or core business the Group rating can be extended to the subsidiary • Corrections may be applied making the rating deviate slightly from the Group’s rating (around 2 notches) • When rating a Group (for which we have no figures), but we have ratings on core business(es) / strategic subsidiaries • If company(ies) rates represent a significant portion of the sales/assets, rating of subsidiary (weighted average rating of subsidiaries) may be applied to the group • Corrections may be applied to other facts known by the analysts and not reflected in the subsidiaries ratings

  11. Types of CCRs: Quick Rating (CCR without figures) No figure & no grid may be used as a reference • Public buyers • Country rating • Experience • Stand-alone company • Country Rating • Experience • Assessment of the company’s environment • Assessment of the size of the company • Assessment of the company’s financial situation (e.g. doubts over indebtness)

  12. Ratings in the Middle-East: Breakdown by countries

  13. Ratings in the Middle-East: Countries covered Q&A

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